Faced with a retirement on today’s measly pensions, lots of us are looking for a way to boost our income so we can live out our golden years in a lifestyle we’re accustomed to. Currently, around 12 million workers face retiring on an inadequate income.
Equity release is a way of taking cash from your property, either as a lump sum, in monthly instalments, or as a combination of both. For those already retired and living on a low income, this option could hold a lifeline during your golden years.
The major benefit of equity release over other plans to release cash from property, such as downsizing, is that you don’t have to move house. The advantages over taking out unsecured loans and credit cards is that there are no monthly repayments to be made. Any debt and interest accrued is settled with the sale of your home once you pass away.
There are two options available in terms of equity release, which have slightly different processes when you die.
Lifetime mortgage plan
A lifetime mortgage is an equity release scheme that allows you to take out a loan against your home. You retain the legal ownership of the property and the right to live there until you either die or move into a long-term care home. You don’t have to make any monthly payments.
When you (and your partner) pass away, your home will be sold to repay the loan along with interest accrued. Money left over will be passed on to your beneficiaries as dictated in your will. There is no way of knowing how much interest you will be charged, simply because you don’t know how long you will live. It is possible to pay the interest every month to reduce the amount you owe at the end of the plan, or you can let it roll up.
If your debt and the interest combined amount to more than what your property is worth, the outstanding would have to be settled by your family. To prevent this situation occurring you should only consider equity release schemes from members of the Equity Release Council. This ensures you are protected by the ‘no negative equity guarantee’ so you never owe more than what your property is worth.
Home reversion scheme
Home reversion operates differently to a lifetime mortgage in that you actually sell a portion of your home as opposed to taking out a loan against it. Again, you can stay in your home for as long as you wish, and you don’t have to make any monthly payments.
Once you pass away, if you have sold a percentage of your property under a home reversion scheme it would again need to go to market. Upon the sale of the property, the proceeds would be divided in the specified proportions between your estate and the equity release provider.
It is possible to sell 100 percent of your property under a home reversion scheme, but remain living in the property – again, for as long as you wish. In these circumstances, upon your death your home would be the possession of the equity release company and they may choose to sell it or rent it out.
Equity release is a viable option for homeowners facing retirement on a restricted income, but it is always recommended that you seek expert advice when considering it. Questions like “what will happen to my house upon my death?” enable you to obtain a clear picture, so you can make a decision that’s appropriate for your circumstances.
Nick Taylor writes for equity release specialists Retirement Experience on all issues related to financing your retirement.